Answering Jesse Jackson on the Prescription Drug Benefit

Published February 22, 2006

Jesse Jackson, echoing the talking points of the Democratic Party, wrote recently in his syndicated column that the prescription drug benefit being rolled out for senior citizens on Medicare was “written by and for the insurance companies and the drug companies by compromised and compliant Bush political appointees and Republican legislators.”

Given that the plan was the result of negotiations among 435 Congressmen and 100 Senators, all the while besieged by interest groups from every corner of the country, it is something of a miracle that it turned out to be rather well designed. Benefits are concentrated on the truly poor and those with really big drug bills, as it should be.

While Democrats now deplore the resulting “donut hole” in coverage, it was a negotiated solution (not entirely successful) to keep the cost of the program within budgetary bounds. Beyond that, it prevents the program from becoming just another middle-class entitlement.

Democrat critics point to a section of the Medicare Modernization Act (1860D-11(i)) that reads, “the Secretary may not interfere with the negotiations between drug manufacturers and pharmacies and PDP (prescription drug plan) sponsors.” This, they say, is the smoking gun, evidence the bill was written to protect drug companies instead of consumers.

Is it? The text immediately preceding the words quoted above reads: “In order to promote competition under this part and in carrying out this part. …” The provision, in other words, is intended to protect competition from government interference.

The MMA relies on private drug benefit management firms to negotiate steeper price discounts than the government could if it negotiated directly with drug companies. When asked if the cost of the program would be less if direct negotiation were allowed, the Congressional Budget Office in a January 23, 2004 letter to Sen. Bill Frist (R-Tennessee) said the effect on federal spending would be “negligible.”

“[P]rivate plans will have strong incentives to negotiate price discounts,” reads the letter, “both to control their own costs in providing the drug benefit and to attract enrollees with low premiums and cost-sharing requirements.”

One might say this was prescient, given reports in recent weeks that the average monthly premium being charged for coverage is about $25, considerably less than the $37 originally predicted.

Allowing government to interfere with negotiations over drug prices wouldn’t save taxpayers any money, but it would raise the specter of government using its monopsony power to impose price controls on drugs, with ruinous effects. Do you remember waiting in line for gasoline during the “energy crisis” under President Jimmy Carter? That was caused by price controls on oil. Price controls imposed on drugs would cause shortages of existing drugs and fewer and fewer new drugs being brought to the market.

While waiting in line for gasoline was inconvenient, it probably wasn’t fatal. Waiting in line for a life-saving drug, by contrast, can be fatal.

Joseph L. Bast ([email protected]) is president of The Heartland Institute.